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After Abbott Deal Collapses, GE Unlikely To Seek Similar-Sized Dx Buy This Year

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
A couple of days after announcing that has pulled out of its planned $8.1 billion acquisition of two of Abbott’s diagnostics divisions, GE officials suggested during a conference call that it was highly unlikely that the firm would make any acquisitions this year costing more than $2 billion.
GE has decided that the best use of its cash following the scuttled acquisition is to accelerate its stock buyback program. Company officials offered little information as to the reason for pulling out of the deal, other than to cite its complexity, but some analysts believe Abbott’s problems with the US Food and Drug Administration may have played a role.
Meanwhile, GE reported that second-quarter revenue for its Healthcare segment had slipped slightly while profits dropped 8 percent for the unit.
Last week, GE and Abbott jointly announced that the contract for GE to acquire Abbott’s in vitro and point-of-care diagnostics businesses for $8.13 billion had been terminated after the firms were “unable to agree on final terms and conditions of the proposed sale.”
GE Chairman and CEO Jeff Immelt said during the firm’s second-quarter conference call two days later that it was a “pretty safe bet” that GE would not be looking at acquisitions above $2 billion for the rest of the year, given the firm’s aggressive stock buyback plan.
“This was a complex transaction that both sides worked very hard to close,” said Immelt. “We just, in the end, couldn’t reach agreement. But I want to put that in some context. We’ve invested more than $20 billion in healthcare over the last 10 years in more than 100 transactions. We love this business, [and] we plan to continue to invest in it.
“This was an acquisition when we announced it we intended to close,” said Immelt. “As it played out … we just weren’t able to get it done.”
Some analysts have speculated that one reason the deal was never consummated could have been Abbott’s ongoing difficulties with the FDA. Abbott has had issues with FDA compliance dating back to 1993 and agreed to pay a $100 million fine in 1999 related to those issues.
The firm’s most recent problem was a warning letter from the FDA in March that cited compliance issues at a manufacturing plant in Irving, Texas.
The acquisition, which was announced in January, was part of GE’s plan to reposition its Healthcare unit’s focus on an “early health model” that fuses in vitro and in vivo diagnostic technologies (see BioCommerce Week 1/24/2007). It also would have transformed GE Healthcare from a firm with no in vitro diagnostics component to the world’s second-biggest IVD player behind Roche.
However, the proposed deal did not include Abbott’s molecular diagnostics business, and GE has remained relatively quiet on its plans for this particular portion of the diagnostics industry, which industry observers view as a potentially lucrative and high-growth area.
The deal to acquire Abbott’s diagnostic businesses was viewed by many as GE’s answer to aggressive moves made by long-time rival Siemens in the diagnostics field. Over the past year, Siemens completed the acquisitions of Diagnostics Products Corp. for nearly $2 billion and Bayer Diagnostics for roughly $5.25 billion (see BioCommerce Week 7/5/2006).
What Now for GE?
Though there are very few firms that can offer potential acquirers the kind of broad diagnostics portfolio and market reach that Abbott and Bayer offer, such candidates — including Beckman Coulter and Dade Behring — would also likely cost several billion dollars. Given comments made by GE officials during the firm’s second-quarter conference call, it does not appear the firm will make a similar big-money bid for the remainder of this year.
Morningstar analyst Ramesh Poola told Reuters last week that he still expects GE to try and match Siemens’ acquisitions in diagnostics. “I’d look for a $2 billion deal,” he said.
But with increasing multiples being paid for diagnostic properties — such as Roche’s recent hostile bid to buy Ventana Medical Systems for roughly $3 billion, or eight times its annual revenue (see BioCommerce Week 6/27/2007) — there is a limited pool of acquisition candidates that would likely cost under $2 billion and that could give GE a portfolio of widely adopted tests in the marketplace or a platform to build off. Among those acquisition candidates could be molecular diagnostics firms Cepheid and Gen-Probe.

“We’re well set up to grow [the healthcare business], and over time strategically we’ll always look for ways to grow the platform … We’ve got a chance to make smart choices that make sense for the business in the future.”

Asked during the conference call about GE’s plans for the diagnostics sector going forward and whether the firm would seek another acquisition or possibly a joint venture, Immelt suggested such a move was not imminent.
“We’re well set up to grow [the healthcare business], and over time strategically we’ll always look for ways to grow the platform,” he said. “I would say I’m patient. We’ve got a chance to make smart choices that make sense for the business in the future.”
Tied to the decision not to pursue another deal of the size and scope of the Abbott bid is GE’s stock buyback plan. Company officials said last week that the firm intends to buy back $12 billion of its stock in the second half of 2007.
The buyback is part of a program begun a couple of years ago that aimed to reclaim $25 billion worth of stock, and is now $27 billion following the collapse of the Abbott deal. Immelt also said the firm would probably announce another buyback plan beginning in 2008.
“If there’s not favorable acquisitions out there, we return it back to investors,” said Immelt. “We like returning capital to investors. We like making strategic acquisitions … and that’s how we went through the decision.”
Immelt also said the firm always looks to invest in rapid-growth, high-return businesses.
Healthcare Revenues, Profit Drop
Though Immelt said during the call that the Healthcare business is “well-positioned for the future,” second-quarter revenues for that segment declined 1 percent to $4.13 billion from $4.16 billion year over year. Profit for the Healthcare segment dropped 8 percent to $731 million from $795 million.
“At Healthcare, the impact from the Deficit Reduction Act and the continued regulatory suspension on shipments of surgical supplies by our OEC business was greater than expected,” said Immelt in a company statement. “In the short term, these challenges more than offset strong performances in our other Healthcare businesses. However, the future of this business remains solid.”
Second-quarter revenues for all of GE were $42.3 billion, a 12 percent increase over last year’s second-quarter revenues of $37.7 billion. The firm’s net earnings grew 10 percent to $5.4 billion, or $.53 per share, from $4.9 billion, or $.46 per share.
GE currently has $42 billion in available capital, CFO Keith Sherin said during the call. “We can create additional capital through additional portfolio actions,” he said, noting that the firm may sell off some assets in the financial services area.
The firm had purchased WMC Finance, a wholesale mortgage lender, three years ago, but losses at the unit have led GE to decide to “exit this business.”

Immelt added the firm feels “no time urgency” on its portfolio review.

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